Weekly Market Wrap

Economic data and a lack of surprises from the Fed helped US equity markets break two weeks of downward momentum this week. Anticipation ran high ahead of Wednesday's FOMC decision as market participants speculated whether the Fed would change its commitment to keeping rates low for an "extended period" of time. The comment remained untouched and another key line was changed to read household spending is "expanding" (rather than the "seeing signs of stabilization" verbiage in the prior statement). In the latter half of the week, investors obsessed over three days of US employment data. Wednesday's October ADP employment report showed slightly more job losses than expected, although the numbers declined by the smallest month-over-month loss since July 2008. On Thursday the weekly jobless claims numbers hit their lowest levels since the very beginning of 2009. On Friday, the annualized October unemployment rate popped over 10% and the decline in Oct nonfarm payrolls was bigger than expected. But traders took some comfort from the August and September nonfarm payroll revisions which were bumped up by a total of about 90 thousand jobs, contributing to an improving three-month moving average. After all the data was out on Friday, PIMCO's Paul McCulley said he expects job creation to be a "very slow slog." Front month crude ended the week just above where it began, at $77.50, while gold pushed out to another record high of $1,100 on Friday. For the week, the DJIA, Nasdaq Composite and S&P 500 Index each gained about 3.2%.


Warren Buffet's big play for Burlington Northern dominated headlines mid-week. Berkshire Hathaway said it would acquire the 77% of the railroad firm it did not already own for $100/share in cash and stock, in a deal valued at $44B. Buffet noted that the stock component was a sweetener to BNI holders "for tax purposes" and called the deal a "bet on America." In the aftermath of the announcement, Berkshire's board approved a 50-1 split of its class B stock in order to accommodate smaller holders of BNI and S&P placed the company's AAA ratings on watch negative. In other M&A news, investment firms TPG Capital and CPP Investment Board announced a deal to acquire IMS Health for more than $5B in cash.
Health insurance stocks have made impressive gains thanks to a strong Republican showing in Tuesday's elections and solid quarterly earnings out of sector-leading firms. Many commentators called the Republican gubernatorial wins in Virginia and New Jersey a referendum against the healthcare plans of President Obama and the Congressional Democrats. Aetna, Cardinal Health and Cigna exceeded expectations in quarterly earnings reports. Note that Aetna trimmed its full-year guidance range, and warned that the uncertain employment situation in 2010 may constrain the business. Casualty insurer Allstate missed top- and bottom-line estimates.

In other earnings, Cisco Systems lead the broader tech sector higher after beating estimates and adding even more funding to the company's giant stock buyback program. CVS remains down significantly after the company said its pharmacy benefits management business may decline as much as 12% in 2010. Kraft beat bottom-line expectations and missed revenue targets. The company said it remains interested in Cadbury but also said it is "well positioned with or without Cadbury." Ford reported its first profitable quarter since early 2008 and said the firm would be "breakeven or better" by 2011. Toyota reported a loss for the first half of FY09. GM's Finance arm GMAC disclosed that its quarterly loss doubled on a sequential basis in Q3, with credit losses more than doubling.
The New York Times took a pot shot at Citigroup on Sunday, asking in a headline whether the bank will be able to "carry its own weight." The article discussed looming problems in Citi's huge credit card portfolio and called the bank's financial architecture "rickety." Rochdale's Dick Bove commented on the piece, saying "Citigroup is dead, a smaller Citicorp will arise." The drumbeat of negative commentary on commercial real estate intensified this week. "Two years into a substantial economic downturn, loan quality is poor across many asset classes and … continues to deteriorate," said Jon Greenlee, the Fed's associate director of banking supervision. Greenlee said commercial real estate problems would put pressure on bank earnings. Meredith Whitney reaffirmed her long-term cautious view on the sector, warning that profits will pressured by more deleveraging, restructuring, regulatory uncertainty and further withdrawal of credit from the system.
Financial basket cases AIG and Fannie Mae reported third quarter results. AIG managed to rack up its second straight quarterly profit, although it was a fraction of the $1.8 billion gain in Q2 (and much better than last fall's $24B loss). The latest results included $1.95B in special gains, including improvement in the value of securities held by the infamous AIG Financial Products. Fannie Mae lost nearly $19B and asked the US Treasury for another $15B in funding. Fannie said it expects home prices to decline another 6% in 2009, with weakness in real estate to continue into 2010.

Short dated yields came under some pressure on Wednesday after the FOMC maintained its commitment to keeping rates exceptionally low for an extended period. The statement threw cold water on the notion the Fed needs to raise rates soon, a move that several major financial publications had called for over the weeks leading up to the November decision. The 2-year note yield fell some 5bps in the immediate aftermath of the announcement, with 2s and 10s steepening though 260bps for the first time since the middle of the summer. Friday's mixed employment reports saw buying return to the belly and long end, with the yield on the benchmark 10y Note briefly dipping back below 3.50%. Fed Fund futures are not pricing in any chance of a rate hike until likely the summer of 2010, but in contrast 10y TIPS breakeven spreads are sitting right at their highest levels of the year, and near levels last seen in August 2008. Next week, things remain interesting as the market faces $81B in refunding, with a significant drop in duration, as almost half of the supply is in longer parts of the curve.

In FX, the greenback tried its best to break key levels during the early part of the trading week and ditch the carry-trade funding reputation it has acquired since spring, but EUR/USD managed to hold the key 1.4630 March uptrend line. The dollar's price action sustained its inverse relationship to the equity and commodity markets, while the media continued focus on the fact that US Treasury officials are not expressing any concerns about dollar weakness and seem to believe current trading is not a major concern for the country. Dealing desks note chatter circulating about good selling pressure in USD/CNY long-dated forwards ahead of President Obama's visit to China later this month. Dealers are again speculating that these sorts of developments could prompt a weaker dollar again other Asian pairs in coming months.
Early in the week the dollar benefited from a spat of risk aversion stemming from the financial sector after the British government said it would provide more aid to Lloyds and RBS and CIT filed for bankruptcy protection. An EU Commission report complemented risk fears, warning of more banking sector losses in region. The Commission said losses in the sector could run as high as between €200-400B in 2009-10. Meanwhile, an EU growth forecast highlighted some of the fiscal constraints on member state budgets over the next several years. Greece announced a one-off charge on its 300 biggest companies to raise just under €900M in funds. Fallout from the recession caused Fitch this week to cut Ireland's sovereign rating one notch, to AA+ from AAA.

US economic data whetted risk appetite in the latter half of the week, throwing the greenback on the defensive. Across the pond, the ECB and BoE both left key interest rates unchanged, as expected. The BoE added another £25B to its quantitative easing program, after recently completing its £175B program. Sterling firmed up in the aftermath of the announcement, given many analysts were seeking a £50B increase. GBP/USD tested 1.6640 before consolidating in its post-decision range. In Frankfurt, ECB Chief Trichet said the bank would begin mopping up extra liquidity soon, and largely reiterated the usual barrage of rhetoric about rates being appropriate, signs of economic recovery emerging in 2009 and slow recovery arriving in 2010. The dollar managed to recover from session lows after Trichet's comment that a strong USD was in US's interest and reiterated the G7 position that excessive volatility was unwanted. Trichet did note that an orderly appreciation of emerging market currencies is a good way to correct global imbalances.
The Reserve Bank of Australia continued to lead the charge toward the exit from easy money policy with its second consecutive 25 basis point rate hike. After the decision, the RBA raised its 2009 GDP forecast to 1.75% from 0.5% and 2010 GDP view to 3.25% from 2.25%. The Aussie trade balance data for the month of September was better than expected, but still registered an 18-month high deficit, cooling some of the expectations for additional rate hikes in coming months. More concerning, exports to China fell for the second consecutive month, while iron ore exports saw a three-month low.

On Monday, the Chinese government reported the highest PMI figure since April 2008. Separately the World Bank lifted its outlook for China GDP for the current year by over 1%, forecasting 8.4% growth versus the prior estimate of 7.2%. That level is above the official Chinese target of 8.0% and more in line with recent target views out of Chinese economic research and planning bodies. In 2010, World Bank forecasts a slightly higher rate of growth at 8.7%, but noted that it was premature to implement a major policy tightening in China.

Trade The News Staff
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